Consumer confidence falls on fiscal cliff fears

Dec. 27, 2012
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Inside an H& M store in Atlanta. / David Goldman, AP

by Paul Wiseman, AP

by Paul Wiseman, AP

WASHINGTON (AP) - U.S. consumer confidence tumbled in December, driven lower by fears of sharp tax increases and government spending cuts set to take effect next week.

The Conference Board said Thursday that its consumer confidence index fell this month to 65.1, down from 71.5 in November. That's the second straight decline and the lowest level since August.

Stocks fell sharply after the consumer confidence report was released at 10 a.m. ET.

The survey showed consumers are slightly more optimistic about current business conditions and hiring. But their outlook for the next six months deteriorated to its lowest level since 2011.

Lynn Franco, the board's director of economic indicators, said the decline in expectations for the next six months is a signal that consumers are worried about the "fiscal cliff." That's the name for the automatic spending cuts and tax hikes that take effect Jan. 1 if the White House and Congress can't reach a budget deal.

A separate survey released last week by the University of Michigan showed consumer confidence fell in December to a five-month low. And a report from MasterCard Advisors Spending pulse indicated holiday sales grew in the two months before Christmas at the weakest rate since 2008, when the country was in a deep recession.

The December drop in confidence "is obvious confirmation that a sudden and serious deterioration in hopes for the future took place in December - presumably reflecting concern about imminent 'fiscal cliff' tax increases," Pierre Ellis, economist with Decision Economics, wrote in a note to clients.

Investors may have also reacted to comments from Senate Majority Leader Harry Reid, who spoke shortly after the poor consumer confidence survey was made public. Reid, D-Nevada, warned that the government appears to be headed over the "fiscal cliff" because talks had gone nowhere.

Negotiations between President Obama and House Republican leaders on a package to avert the sharp tax increases and spending cuts reached an impasse last week. Obama and congressional lawmakers return to Washington Thursday to resume talks with just days to go before the deadline.

Treasury Secretary Timothy Geithner added pressure to the talks Wednesday by alerting Congress that the government was on track to hit its borrowing limit on Dec. 31. He said Treasury would take "extraordinary measures as authorized by law" to keep the government operating for another couple of months.

The Conference Board index has risen from an all-time low of 25.3 touched in February 2009. It remains well below the level of 90 that is consistent with a healthy economy. It last reached that point in December 2007.

Although consumers are more worried about where the economy is headed, they were upbeat about present conditions, according to the latest survey.

Their assessment of current economic conditions rose this month to the highest level since August 2008. Falling gasoline prices, which hit 2012 low of $3.21 a gallon last week, have brightened the mood somewhat.

Other reports Thursday show the economy is improving. The average number of people filing for unemployment benefits over the past month fell to the lowest level since March 2008, the Labor Department said.

And the Commerce Department said new-home sales rose in November at the fastest pace in 2½ years, further evidence of a sustainable housing recovery.

While a short fall over the cliff won't push the economy into recession, most economists expect some tax increases to take effect next year. That could slow economic growth.

The drop in consumer confidence in December comes as retailers are wrapping up a holiday shopping season where consumers have spent more cautiously than expected. Consumer spending drives roughly 70% of economic growth.

There were other distractions this holiday season. In late October, Superstorm Sandy battered the Northeast and mid-Atlantic states, which account for 24% of U.S. retail sales. That coupled with the presidential election, hurt sales during the first half of November.

Shopping picked up in the second half of November. But "fiscal cliff" worries dampened sales in December.

The National Retail Federation, America's largest retail trade group, remains optimistic that sales won't be quite as bad as earlier reports have suggested. It is sticking to its forecast for total sales for November and December to be up 4.1% to $586.1 billion this year. That's more than a percentage point lower than the growth in each of the past two years, and the smallest increase since 2009 when sales were up just 0.3%.

AP reporter Anne D'Innocenzio contributed from New York to this report.

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